A Persian Cafe, Edward Lord Weeks

Tuesday, 4 March 2014

Why nationalise the railways? And why not privatise the Royal Mail?

Warning: this post is only likely to be intelligible to people with some education in economics.

One of the causes célèbres of the modern left in Britain is nationalisation of the railways. The story goes that that nasty Thatcher woman privatised them and ever since they have been terrible. It is notable in its lack of any theoretical justification for nationalisation. Let's look at the various economic arguments as to why a government might intervene in the economy at a microeconomic level. They can be categorised into:

Externalities - that is, when my behaviour affects other people positively or negatively.

Public goods - that is, those goods which are non-rival (my enjoyment of it does not impede your enjoyment of it) and non-excludable (if I produce it, I cannot prevent you from using it).

Information issues - if you know something I don't then you have an opportunity to scam me and therefore I am likely to avoid trading with you even if you are honest.

Issues relating to poverty and/or inequality.

Natural monopolies (that is, industries with constantly falling average cost of production as quantity produced increases).

Do railways fit any of these categories, and if so does this merit nationalisation (or anything even close to it)?

There are externalities from railways, it is true - noise and air pollution. But the noise is obviously solvable without government intervention beyond enforcement of a private solution through Coasean bargaining, while the air pollution is easily reduced to an economically efficient level through a Pigou tax, equal to the damage caused by the pollution. Nothing anything like nationalisation.

Trains aren't really non-rival, since there are issues of crowding and the inevitable noise which comes from having large numbers of people. Moreover, they are clearly excludable - if you don't have ticket, then you will be heavily fined if you are found on the train.

Information issues don't really plague the industry. We all know what we're paying for, the timetables are easily available, and there isn't great variety in the level of service.

Yes, poverty exists, but to imagine that nationalising the railways is a step towards solving it is away with the fairies. And if we're concerned that people can't pay the train fares, then it is more efficient to just give them money which can also be spent on food, clothes and anything else which might be more essential to them than train tickets, than to give them cheaper fares.

Are railways natural monopolies? No, on two counts: firstly, the average cost of production is not constantly falling - yes there is a significant fixed cost in the form of the track, but the biggest cost in that is simply due to our countries archaic town and country planning laws. We could easily have several train routes between London and Birmingham, and while this might be rather harder for cross-city trains it shouldn't be impossible. Second, even if a train company need not compete with other train companies it still needs to compete with other modes of transport - cars, buses, trams, planes, boats, cycling etc.

So quite simply, none of the traditional arguments for government intervention can anywhere near suggesting renationalisation of the railways. With that in mind, what justifications have people advanced?

This webpage provides a fairly neutral discussion of nationalisation in general, and presents four arguments as to why it might be a good idea. These boil down to:

The idea that central planning is an efficient way of operating an economy

Nationalised banks can be funded more quickly if they are in hot water

The first argument is clearly false, as history has shown.

The second is a misunderstanding of externalities, conflating them with consumer surplus. Besides which, even if it were true it would justify nothing more than a subsidy.

There are certain economies of scale, and there's no particular reason why they can't be achieved in a market context.

Railways are not banks.

Alternatively, let's take this post on one of the more popular UK left-wing blogs.

Britain’s railway system is one of the most expensive in the European Union.

Britain’s railways cost 11 billion a year to run, 5 billion of which is paid for by the taxpayer.

Britain’s privatized railways system now costs the UK taxpayer more than when it was state-owned.

There has been a five-fold rise in government subsidy since privatisation of the railways.

Britain’s rail system is the most inefficient in Europe.

According to the Office of Rail Regulation (ORR), Britain’s rail system is up to 40% less efficient than European rivals including Germany, Ireland and Belgium.

Britain’s railways are less safe than their European counterparts.

According to the International Union of Railways, Britain has 0.36 deaths per billion kilometres compared with Italy’s 0.10, France’s 0.27 and Germany’s 0.31.

Britain’s rail ticket prices are the highest in the European Union.

According to the commuter watchdog, Passenger Focus, Britain’s rail passengers are paying 50% more than rail users on the continent.

And now the coalition government has announced plans to allow rail fares to go up by as much as 8% in England- with some rail companies setting even higher rates.

I'll assume all of this is true. So what? Of these, only the second has any bearing whatsoever on the question of public vs. private ownership. Our railways are expensive relative to those of other countries, but there are numerous reasons why that might be - weather conditions, inability to achieve certain economies of scale, strong unions, over-regulation by government, etc. Even the second statement is of only marginal relevance - if the subsidy is bigger, then the question is simply "Have the externalities which justify the subsidy increased?" Given that the answer is no, this is quite obviously a case of bad governance in the form of subsidising that which ought not to be subsidised.

A survey in 2009 found that as many as 70% of the British public would support re-nationalisation of the railways. A mere 23% supported privatisation.

So what should Labour’s policy on railways be?

This isn’t rocket science. The answer is clear.

Labour should pledge to bring back British Rail and completely re-nationalize the railways.

Because as we know, the average man in the street is in an excellent position to know what exactly the government ought to do in any given situation.

The directors of the main private train operators have made spectacular profits since privatisation. But despite this, they let the service deteriorate and invested too little in the rail network. This finally resulted in accidents such as the 2002 Potters Bar disaster which claimed seven lives and injured 76. The 3 million pound fine for the disaster imposed on the private firm Railtrack PLC and the private contractor Jarvis PLC was finally paid by the taxpayer as both firms had been wound up, meaning the directors were no longer liable.

When Railtrack PLC was finally wound up in 2002, the company was renamed Network Rail, which is technically a private business. In many ways this is the worst of all worlds, a private company, backed by the taxpayer with not even any shareholders to answer to.

The executives in charge of Network Rail have taken advantage of this comfortable situation, and have been paying themselves bonuses and perks which have shocked even the present government.

When the government is clearly ready to step in to save a failing business, this creates moral hazard! Who'd a thunk it? Basically, this is again a problem directly caused by government intervention - instead of allowing creative destruction to happen when directors mismanage a company, the government steps in to pay to keep the company alive. With the government rewarding failure in this way, why should we expect success?